How on earth is the government going to finance new nuclear?

  • 06 Mar 2013, 13:45
  • Ros Donald

The UK government must be willing to pay more to get two new nuclear power stations built - though it would be much cheaper to build them itself, according to a report by a parliamentary committee in a new report released earlier this week. As negotiations to build the plants reach crisis point, we take a look at the current financing options and those explored in the document. 

The UK government plans to build 16 gigawatts (GW) of new nuclear power - about eight new power stations -  by 2025. But negotiations with power company EdF to build the first one at Hinkley Point are faltering. In its  report, the Energy and Climate Change (ECC) Committee calls on the government to come up with a "plan B" in case the talks fall through. 

The committee's chairman, Tim Yeo told Radio 4's Today Programme on Monday that the government "should be willing to pay more" to get the first two nuclear power stations built. The report suggests the government should guarantee nuclear build up to a maximum of £50 billion. Or alternatively, it would be cheaper if it built them itself, it adds. But other energy experts seem less convinced by these solutions.  

Strike price- support or subsidy?

So what does the government plan at the moment? Under a mechanism in the energy bill called a strike price, the government will guarantee energy companies get paid a certain amount for each megawatt hour of electricity nuclear plants produce. 

The Conservatives and Liberal Democrats promised in their coalition agreement not to offer subsidies to new nuclear power. But ministers later changed the wording to " no unfair subsidies" - meaning it won't receive any support unless other low-carbon energy sources do too

The government argues the strike price isn't a subsidy because if wholesale prices go above the strike price, then the consumer benefits - as it also sets a maximum level on the amount energy companies charge for the electricity. 

But Dr Paul Dorfman, an energy research fellow at the University of Warwick, says:

"[The strike price] will be well above the market price for electricity, and this means that energy consumers will be paying the difference. The contract will be locked in for very many years, possibly decades. The impact of this contract will be to shift the economic risk of building new nuclear facilities from the nuclear corporations to the consumer."

The ECC commitee recommends the strike price should be no more than that offered to offshore wind, which is £100 per megawatt hour.

But Dorfman calculates that a strike price of £100 per megawatt hour over a 30 year contract would still mean households and businesses would have to pay out £30 billion overall to guarantee the nuclear power price. And if the rest of the 16 GW new nuclear fleet were financed on similar terms - on time and on budget - that would mean consumers would pay £150 billion extra in total on their energy bills by 2050.

More support: the guarantees scheme

New nuclear projects also look set to receive support to help offset the risk of cost overruns - up to £50 billion under a mechanism called the Guarantees Scheme announced last year. 

Building nuclear power stations is fraught with delays and cost overruns. Two nuclear stations currently under construction - one in France and one in Finland - are both currently running twice over their original budget and are expected to come online years late. The government has offered guarantees to help companies borrow more money or buy more equipment if things go wrong.  

The ECC committee wants to see the government offer more support to nuclear build. It recommends:

 "Given the important role for nuclear generation in the UK's future energy mix, the Government should extend this support to all nuclear new build projects, which may require increasing the amount of available assistance to more than £50 billion."

Of course, the guarantees scheme doesn't necessarily mean the government will actually have to spend any money - just offering guarantees for loans. But Dorfman argues the guarantees are very likely to be called in:  

"Allowing EdF to have state guarantees for the cost overruns of Hinkley C will, on the basis of previous experience, result in the government having to pay for those guarantees. This means that billions of pounds will be diverted from [public projects]  towards guaranteeing profits for EDF."

Government-built nuclear?  

The ECC committee's report contains a surprising section, in which it suggests the overall cost of building new nuclear power plant would be much cheaper if the UK government built the power stations itself and then sold them back to the industry. It says:

 "This is because with its very good credit rating, the government can borrow money at a cheaper rate than the private sector and therefore the overall cost of projects will be lower."

So could the government actually save money by putting up the cash itself? Anthony Froggatt, a nuclear specialist at Chatham House, says it's not that simple. While that tactic might reduce the cost of raising money to build the plant, it doesn't answer all the problems associated with building nuclear stations. He explains: 

"Capital costs [...] are a significant part of the costs of nuclear electricity.  However, if the government takes over responsibility for new build, it then take more of the risks, which may in the long run be more expensive." 

Dr David Toke, a lecturer in energy policy at the University of Birmingham, also disagrees with the ECC committee's claim that government nuclear build would be cheaper. He says "there does seem to be a push"  in some quarters for this kind of arrangement - but if it went ahead, the expenditure would be enormous: 

"This idea only seems good if you regard nuclear power as being much more important than just about anything else in the British economy including renewable energy and energy efficiency". 

That's to say nothing for EU state aid rules - the government could find itself in real trouble with the European Commission if it decided to support the nuclear industry over all other energy generators. It's a problem that has already raised its head in connection to the government's plans to guarantee returns on nuclear power generation, which would be illegal under EU law if the commission deems them a subsidy.

The least-worst option

Both the ECC committee and the government have stressed that nuclear should not go ahead if it is uneconomic, but the report highlights that it's almost impossible for the government not to spend an enormous amount if it wants the technology as part of the energy mix.

As the government's talks with EdF rumble on - or potentially peter out - the calls for the government to foot the bill itself might get louder. It may start to sound like a more attractive option as ever more favourable terms for EdF are mooted to try and save the deal. 

But even if the strike price were a subsidy in all but name, the consumer's liability for the nuclear industry is limited under the scheme. If the government were to shoulder the burden of new nuclear build itself, the costs could be limitless.

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